With Qualcomm Buyout Looming, EvoNexus Aims for Self-Sufficiency
In the nine years since San Diego’s EvoNexus incubator began amid the great recession of 2009, CEO Rory Moore has emphasized it is a pro bono program—startup teams admitted to the technology accelerator get free office space and other perks, with no strings attached.
EvoNexus operates as a non-profit, which is possible because dozens of local tech companies, law firms, and others provide funding to sustain the incubator’s pro bono operations. Three strategic partners in particular provide substantial (undisclosed) support—Qualcomm (NASDAQ: QCOM), ViaSat (NASDAQ: VSAT), and the private real estate developer the Irvine Company.
Now, for a variety of reasons, including the possibility that Broadcom (NASDAQ: AVGO) will succeed in its hostile offer to acquire San Diego-based Qualcomm, Moore is moving to change the incubator’s business model. In a bid to put the incubator on more self-sufficient footing, Moore said the EvoNexus board of directors is expected to vote Friday morning on a proposal that would require future startups admitted to EvoNexus to provide a small percentage of their founders’ shares to the non-profit.
It may take years to realize any revenue from the change. But the idea is that even a small stake in a few successful outcomes could go a long way toward putting EvoNexus on a path to sustaining its business operations long-term.
Of the 186 portfolio companies that EvoNexus has admitted since 2010, Moore said 21 have been acquired for a total of roughly $650 million. The biggest by far was Outerwall’s $350 million acquisition of EcoATM, a tech startup that developed innovative technology for kiosks that enables consumers to recycle their mobile phones and other devices.
Although he outlined his plan for Xconomy a couple weeks ago, Moore declined Monday to talk about details of his proposal before the board meeting. As a first step, though, he has asked the 43 startups in residence at EvoNexus—companies that were admitted on the prior pro bono basis—to voluntarily provide 5 percent or less of their founders’ shares to the non-profit.
For the companies already incubating, Moore said his request is on a volunteer basis only. “I’ve been asking them to figure out if you can provide shares back to EvoNexus, and 90 percent said they can do it.” He later added, “They all see it as a way to pay it forward.”
Clay Melugin, a co-founder and CEO of Water Pigeon, a current EvoNexus startup developing wireless technology for transmitting automated water meter readings, is among the founders who are willing to provide some shares to EvoNexus. “There is value here in the networks and in the mentors,” Melugin said. “We were stuck. We came here, and got unstuck.”
Other startup founders said the process for evaluating applications to EvoNexus amounts to a stamp of approval that helped them raise their first venture rounds. The due diligence process, done by experienced volunteers, has screened more than 1,700 applications, Moore said. He boasts that 76 percent of the 186 companies that went through EvoNexus raised a total of $619 million since they were admitted to the incubator.
Many resident entrepreneurs say they empathize with Moore, but his request for founders to voluntarily give up some shares hasn’t been universally well-received. “We wouldn’t have come here if that had been part of the deal when we applied,” said one startup co-founder who added that his team moved into EvoNexus chiefly for the free rent. “I’m already a seasoned entrepreneur. I’ve already got a network.”
Austin Neudecker, a venture investor who no longer volunteers as an EvoNexus mentor-in-residence, said he disagreed with the idea of operating EvoNexus on a pro bono basis. “I always thought EvoNexus should be investing in these companies,” he said. But retroactively asking resident companies to provide founders shares “is a horrible idea,” Neudecker said.
Like many in the innovation community, Neudecker prefers the business model adopted by incubators like Y Combinator and Techstars. For example, every startup admitted to Techstars (as of 2016) gets a $20,000 equity investment for 6 percent of common stock, and is offered an additional $100,000 convertible note with a $3 million to $5 million cap and a 20 percent discount.
EvoNexus, however, has a fundamentally different model, Moore said. The idea for a pro bono tech incubator sprang from CommNexus, a non-profit telecom industry group that consolidated its operations with EvoNexus more than seven years ago. As a result, Moore said EvoNexus can’t operate in the same way as profit-based incubators like Techstars and Y Combinator.
Moore argued that many people in San Diego’s startup community don’t realize EvoNexus provides a different value proposition. Instead of a six-week program focused primarily on software startups, EvoNexus offers office and lab space for up to two years. It provides programs to support startups, arranges meetings with technology companies shopping for technology, venture investors, and volunteer mentors. Moore contends that many portfolio companies are developing hardware technology that is more challenging than software innovation, and that requires more time to advance.
Even those who disagree with Moore’s approach say they recognize the role that EvoNexus plays in the innovation ecosystem in San Diego and Orange Counties. As Neudecker put it, “The reason I volunteered is because I thought it was the best thing going in San Diego.”